What is HUF and how it saves tax?

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Perhaps nothing is worse than seeing a major portion of your hard-earned money going in the form of tax… People try to use methods throughout the year to save taxes. When Ramesh Chopra had to pay Rs 1.5 lakh more as tax, he immediately called his CA. The CA told him that he could have saved tax through HUF. The Ministry of Finance has said that during the year 2022-23, more than 8.75 lakh HUFs filed income tax returns and claimed deductions worth Rs 3,803 crore. So, what are HUFs? How does do they work and how can you save more tax from it?

What is Hindu Undivided Family (HUF)?

HUF means Hindu Undivided Family. It has been created by law. When a Hindu person gets married, his new family becomes an HUF. However, there is a concept of coparcener in income tax law. According to this law, there must be more than one coparcener.  In such a case, when a couple has a child, their HUF comes under the income tax ambit. Apart from Hindus, Jains, Sikhs and Buddhists can also keep HUF.

Who all can constitute to establish an HUF?

In income tax law, HUF is considered a separate entity like an individual. In HUF, a person and his next generation like son-daughter, grandson-granddaughter, great-grandson-great-granddaughter are included. In addition to this, wife and daughter-in-law are also included. For example, if Ramesh shows his family as an HUF, then, being the most senior coparcener of the family he will be the Karta. His son-daughter, grandson-granddaughter born in the same family will be coparceners. While his wife or daughter-in-law who came from another family will be members of the HUF.

Who can put forward claim for partition of properties in the HUF?

All coparceners can be members of the HUF, but not all members can be coparceners. Members have the right to take care of the income or property of the HUF, but only coparceners can claim for partition of the property. However, members will get a share in the partition of property.

Where does HUF get its property from?

CA Vinod Raval explains that the property that HUF has, usually comes in the form of a gift, a will or ancestral Properties. It can be anything- a house, a shop, land, money or property bought by selling family assets. The reason for the creation of HUF is that when someone gets married, the gifts given there is the gifts for the HUF. This is because that gift will not belong to either the bride or groom but of their joint family. Similarly, property received in father’s will or inheritance is also a kind of gift. Any member along with the Karta can gift anything to the HUF.

How will HUF entity be formed?

To show the existence an HUF entity, the Karta has to make an HUF deed. There will also have to be a separate PAN and bank account for HUF. In our example, Ramesh will have one PAN card for HUF in addition to his personal PAN card.

Personal and HUF income will both get tax exemption

Raval says that although the tax rate applicable on HUF is levied like just like that applicable on an individual. Its Karta and members can take tax benefits like 80C, 80D on both their personal earnings and HUF income. Basic exemption limit will be available on both these types of incomes.

Let’s assume that Ramesh Chopra got property after his father’s death. He earns rent on this property. Ramesh can make his family a shareholder in the property as an HUF. Ramesh also has his own job. In such a case, the income from rent will be added to his salary. If they file returns as an HUF in the matter of rent, they will benefit. Now let’s understand its calculation.

Ramesh Chopra’s income is Rs 20 lakh.  More than Rs 7.5 lakh comes from house rent. A standard deduction of 30% will be availed for house repair and other expenses. So, income from house property will be Rs 5.25 lakh 5 lakh 25 thousand rupees… Total taxable income will be Rs 25,25,000. After claiming a deduction of one and a half lakh rupees under 80C, net taxable income i.e. taxable income will be Rs 23.75 lakh on which he will have to pay a tax of Rs 5.33 lakh.

If Ramesh shows salary income and HUF income separately. On a salary of 20 lakh rupees, after claiming deduction under 80C, taxable income will be Rs 18.5 lakh. He will have to pay a tax of Rs 3.91 lakh . On the other hand, after availing standard deduction on HUF’s income of Rs 7.5 lakh, total taxable income will be Rs 5,25 lakh. After availing the deduction under 80C a tax of RS 7,725 will have to be paid.

Ramesh had to pay more than Rs 5.5 lakh tax earlier, but by combining his income and HUF’s income, the ultimate tax outgo will be RS 3.99 lakh. By creating an HUF, he can save Rs 1.5 lakh in tax.

HUF can buy property through Karta. The HUF can invest money in shares, mutual funds, FD or any business. All this work is done through Karta.  By showing earnings as an HUF, you can save a lot of tax, but keep in mind that there are many shareholders in the property.  You should not show your personal income in HUF. Otherwise, you might get an income tax notice. Get the HUF deed made only with the help of a CA or lawyer.